Pension In Germany [A Complex System Explained]

Hardly any topic is as present in German news as the German pension system; a big yet difficult to understand pillar of Germany’s social security system. Essentially, it is highly complex and threatened by demographic change caused by an aging society and an ever-decreasing number of births. In this guide, we will break down everything you need to know about pensions in Germany and share valuable insights on how to best prepare for your well-deserved retirement.

A brief overview of the pension system in Germany

The German pension system comprises three pillars: public pension, state-subsidized pension, and private pension.

1. Public pension in Germany 

Germany’s state pension, or Gesetzliche Rentenversicherung (GRV), is a compulsory pension insurance to which every employee contributes 18.6 % of their gross salary. This mandatory contribution is split 50-50 between employer and employee, meaning each party covers 9.3%. Your employer automatically pays your pension contribution before you get your net salary in your bank account. You can find details on all social security contributions on your monthly payslip.

Your public pension contributions are not saved or invested for your own pension but are used to fund those of current pensioners. Which means the next generation will be paying for your pension. Demographic change is a massive threat to this generational pension contract, as the decreasing workforce of tomorrow will soon be unable to sustain the growing number of pensioners. 

What percentage of salary is pension in Germany?

While pension in Germany is often considered generous compared to other countries, it is cause for concern for most Germans. On average, Germans receive about 48% of their last salary as pension, which is often too little to cover fixed costs without savings. The so-called Rentenniveau (the percentage to which pensions relate to salaries) will further decrease in coming years, with experts predicting a drop below 43% by 2030.

How long do you need to work in Germany to get a public pension?

You must have worked in Germany for at least five years to receive a public pension in Germany. If you are raising a child in Germany, up to three years per child also get counted towards your pension earning years. So, if you have raised two children for a total of six years, you have the right to receive a German pension without ever having contributed through employment.

While your contribution while working gets recognized automatically, your contribution through raising a child does not. You will need to apply for the recognition via the German Pension Fund.

What is the retirement age in Germany?

As of 2024, the legal retirement age in Germany is 67 years for anyone born after 1964.

How much will Your public pension be in Germany?

Determining the pension you will receive in Germany is complex. In summary, it is calculated using the following equation. 

Monthly Pension = Pension Points (Entgeldpunkte) x Access Factor (Zugangsfaktor) x Current Pension Value (aktueller Rentenwert) x Pension Type Factor (Rentenartfaktor)

Pension points (Rentenpunkte or Entgeldpunkte) are awarded based on the annual average income in Germany, which is currently 43.142 euros in western Germany and 41.967 euros in the east. If your salary is precisely the German average, you will receive one point; if it is less or more, you will receive a correlating percentage. You can receive a maximum of 2 pension points per year. 

Your access factor (Zugangsfaktor) reflects your starting age of retirement. If you retire at the intended age, your Zugangsfaktor will be 1. If you retire early, 0.3% will be deducted from that number per month that you retire early. If you retire late, 0.5% will be earned per month of work. 

As of July 1st, 2023, the current pension value (aktueller Rentenwert) per pension point is 37,60 euros. It is regularly assessed and based on the overall economic situation. It can differ between eastern and western Germany. 

In this guide, we are only talking about old-age pension; however, there are different kinds of pensions available in Germany, including disability or bereavement pension. The so-called Rentenartfaktor (pension type factor) gives a value to each kind of pension. While age-based and full disability pensions have a factor of 1, bereavement pensions are lower. 

We have prepared an example to give you an idea of what an average pension might look like. 

Example Pension Calculation

Maria is about to retire at the legal retirement age (Zugangsfaktor = 1) after 40 years of work. Her salary has been above and below the German average, but in the end, she managed to accumulate 42 pension points in total. She is applying for an old-age pension (pension type factor = 1), and the current pension value is 37,60 euros. 

Maria’s pension = 42 (pension points) x 1 (Zugangsfaktor) x 37,60 euros (current pension value) x 1(Rentenartfaktor)

Maria’s pension = 1.579,20 euros gross per month

Maria will receive a gross pension of 1.579,20 euros per month, which is still subject to taxation at income-tax rates. 

To learn more about how pensions are calculated and taxed, you can find detailed information on the website of the Deutsche Rentenversicherung. You can choose different languages at the top of the website, but the German version is the most detailed. 

To use the calculator from the German Pension Fund, you need to know your pension points. Of course, you can use yet another calculator to figure out how many pension points you have accumulated.

Public Pension Calculator for Germany

If you are interested in calculating how high your pension may be, the German Pension Fund’s (Deutsche Rentenversicherung) official website offers a Public Pension Calculator that you can use. Please note that the current pension value needs to be updated in the calculator, as it is stored incorrectly as of today (27.08.2023).

If you are at least 27 years old and have contributed to the German pension insurance for at least five years, you will receive a predicted pension statement (Renteninformation) once a year by postal mail. If you have never received this paper, although you fulfill both requirements, you can request it on the website of the Deutsche Rentenversicherung.

Be aware of the pension gap in Germany

You will notice the considerable gap between your pension and your former salary when starting retirement. Considering that you receive less than half of your paycheck on average, it is evident that a public pension alone will often not suffice to cover expenses without additional savings. All too often, the so-called pension gap not only threatens your standard of living but puts you at risk for old age poverty.

Studies show that almost 20% of current pensioners are affected by old-age poverty, most of them women. It is crucial not solely to rely on public pensions and to build a portfolio of additional pension plans to uphold your standard of living in retirement.

2. Government-sponsored pension plans in Germany

To take pressure off the state pension system and to encourage the public to invest in their retirement, the German government sponsors different private pension plans with various tax benefits. The intent behind it is to reduce your tax burden while you are working so you can grow your investment in a pension plan faster. Once you reach retirement and draw from your pension, the government assumes you will likely have less income than during your working age. This means that your pension at payout will get taxed with a lower tax rate than if it had been taxed during the time of investment. 

To give you an overview of the three government-sponsored pension plans in Germany, we will briefly introduce them below.

Company pension plan (Betriebliche Altersvorsorge)

One of the most prominent government-sponsored pension plans is company pensions or Betriebliche Altersvorsorge, which is mandatory for employers in Germany to offer but optional for employees to accept.

What makes company pension plans interesting is that both the government and your employer sponsor them. This means you get tax benefits and additional funds on top of your contributions. In 2019, almost 54 % of Germans signed a company pension contract. 

While it seems like an excellent investment, company payment plans are often less beneficial than first glance suggests. Maintenance costs are usually high, with returns being low. Furthermore, your pension payout will be taxed at your individual income tax rate at the time of payout. If you change jobs, which many of us do, subsidies you received from your former employer will be lost unless your new employer offers the same pension program. 

You will receive details on your company’s pension plan when starting a job. Go through the policy in detail to determine if it makes sense for you.

Riester pension (Riester-Rente)

Riester pension is a state-sponsored private pension plan in Germany that primarily appeals to low-income employees and families with many children. The best part about it? You get money gifted from the state!

If, within a Riester pension contract that you sign with a private pension fund, you commit to saving a minimum of 4 % of your gross annual salary for retirement, you are awarded government-sponsored allowances, which are:

• 175 euros base allowance per year

• 300 euros per child and year (185 euros for children born before 2008, maximum age for children: 25 years old)

• 200 euros welcome bonus for young professionals under 25 (one-time payment) 

Your allowances are deducted from your owed contributions, meaning you only need to pay the residual, but at least a minimum of 60 euros per year, should the residual be below this amount. 

Riester Example Calculation

Maria has a gross annual salary of 30.000 euros and two children. She wants to contribute 4% of her annual salary to her Riester account to be eligible for state-sponsored benefits. 

4% of her salary = 1.200 euros per year

Intending to save 4% of her salary for retirement enables her to be sponsored by the German government, which gets her the following benefits:

175 euros base allowance for herself

2 x 300 euros for her two children, which were born in 2020 and 2023.

Total state allowance: 775 euros per year

As the German government sponsors her retirement plan with 775 euros per year, she can deduct that sum from her own contributions: 

1.200 euros – 775 euros = 425 euros

Maria now only has to pay 425 euros for investing 1.200 euros per year for her retirement. 

She also profits from tax benefits, as she can deduct her Riester contribution from her taxable income for up to 2.100 euros per year.

We can imagine that this calculation gets you ready to set up your Riester account immediately. But unfortunately, most contracts for a Riester pension are not as profitable as this calculation suggests.

Riester’s main disadvantage is extremely high costs, which in some cases may even exceed the benefits you receive. Return on investment is furthermore low, and the payout is taxed at your income tax rate, which can be up to 42% if you have other income sources during retirement. 

Riester pensions are, therefore, mainly suited for low-income families or families with many children, as their contributions are small compared to the allowances and tax deductions they receive.  

Rürup pension (Rürup-Rente) 

Rürup pension can be seen as the private counterpart of the Gesetzliche Rentenversicherung and was initially designed for freelancers or self-employed people who do not contribute to public pension insurance. Therefore, it is also called Basic Pension (Basis Rente). Despite its original intention, anyone can choose a Rürup plan to add to their pension portfolio. 

The most profound benefit of Rürup is that contributions are 100% tax-deductible for up to 26.528 euros for singles and 53.065 for married couples per year. You also enjoy much flexibility as you can change and pause contributions or make special payments, depending on your circumstances.

You may already see it coming, but while investments during the savings period are tax-free, the actual payout is again subject to income tax. Adding high administrative fees (around 2,85% on average) and low-interest rates, Rürups profitability is also limited.

3. Private pension in Germany

With little public pension and low-profit state-sponsored pension plans, the question remains on how to best plan for a golden retirement age. Arguably, private pensions are the best way to go, as they promise higher returns on investment and allow you to be the driver of your own life and future. 

Different options for private pension (private Altersvorsorge) are available in Germany and worth looking into.

DIY with ETFs in your securities account

When researching today’s best investment choices, it is impossible not to come across ETFs (Exchange Traded Funds). They are often regarded as a relatively safe investment (compared to shares, for example) and generate promising profits across a recommended time of about 15 years. It is, therefore, no surprise that they are a popular alternative to more traditional pension plans.

You can set up an ETF Sparplan (savings plan) to make regular payments to your securities account. You are free to change the payment amount at any time and can cancel the plan if need be. Another benefit of ETF saving plans is that the payout is subject to capital gain tax, currently set at 25%, instead of your personal income tax rate.

If you opt for an ETF that is based at least 50% on a stock index (e.g., the MSCI World or S&P 500), 30% of the capital gains remain tax-free. This means that you would only pay around 18% on any capital gains.

Depending on how high your income will be during retirement, the 25% or 18% capital gains tax can be a significant advantage compared to your potential personal income tax rate of up to 42% on state-sponsored pension plans. 

If you want to learn more about ETFs and where to find suitable brokers, you can refer to our guide below.

Use digital best of both worlds solutions

Taking the advantages of ETFs a step further to help you get the most out of your pension is at the heart of the private pension from Feather Insurance and Pensionfriend. Their pension plan combines the promising profits of ETFs and puts them in a life insurance framework that allows for extensive tax benefits. 

When choosing a Feather or Pensionfriend plan, your monthly contributions will be invested into different ETF portfolios. As your investments are set inside a life insurance framework, your gains are recycled within your insurance, and you do not need to pay the preliminary tax ETFs are subject to.

If you have contributed for at least 12 years and are 62 or older, you also benefit from the so-called Halbeinkünfteverfahren (half-income procedure) in Germany. This means that only 50% of your Feather or Pensionfriend gains are subject to taxation with your personal income tax rate during payout.

Both products are very similar; however, there are three main differentiators:

• Feather:
  • Fees: 0.72% + 1,50 euros monthly
  • Minimum contribution rate: 50 euros per month
  • Accessibility: Worldwide. Their private pension is accessible to you from anywhere in the world. So, if you decide to leave Germany, you can take this pension plan with you, and you can also keep paying into it.

• Pensionfriend:
  • Fees: 1,04% + 5 euros monthly (until the portfolio reaches 10.000 euros)
  • Minimum contribution rate: 100 euros per month
  • Accessibility: Europe only. You can only take this plan with you within the European Economic Area to continue paying into it. Payouts are possible in most countries worldwide.

If you would like to learn more about the investment options from Feather or Pensionfriend, you can calculate your pension on their website and get personalized advice afterward. 

Get expert advice from financial consultants

If you find the topic of pension in Germany confusing and complex and are unsure what the best way forward is, you are not alone. Talking to pension consultants who are experts in their field and can assist with in-depth knowledge and fact-based recommendations of pension providers suited to your needs can be incredibly useful. 

The digital insurance provider Getsafe also has an international team that offers personal consultations in English to find the fitting private pension plan for your needs.

Horbach Expats are a team of international financial advisors living in Germany. Next to English, they consult in seven other languages and have experts for various nationalities, such as US, UK, and Indian citizens. Next to pension planning, they can also craft a holistic financial plan for you and your current life circumstances. An initial financial plan usually costs 95 euros, but when selecting Simple Germany for the question ‘How did you find us?’, you will only pay 50 euros.

We hope we have given you a better understanding of the pension system in Germany and the importance of planning ahead. It is never too early to start so that you truly get to enjoy the golden days of retirement that you deserve.

FAQs

Will you get a pension if you leave Germany?

Yes, even if you leave Germany, you are still entitled to your pension if you have contributed to public pension insurance for at least five years. The process is relatively easy if you stay within Europe, as European pension authorities communicate with each other. Reach out to your local pension authority to start the process when it is time for your retirement. Keep in mind, though, that retirement ages differ across Europe. Even if you live in a country where your retirement starts at 65, you won’t receive your German pension before you turn 67.

If you move outside of Europe, most countries worldwide have signed a mutual social security agreement with Germany, which makes collecting your German pension easy. The German state will cover potential costs for transferring money to international bank accounts, however, conversion fees or losses, as well as any other additional bank fees, will need to be covered by you. 

How do you claim your German pension?

You must apply for your German pension at the Deutsche Rentenversicherung, either online or in writing. Keep your valid ID, pension insurance number, tax identification number, bank account number, and information on your health insurance ready when doing so. You should apply no later than three months before retirement to allow enough time for your application to be processed. 

If you live in Europe or one of the countries that have signed the social security agreement, you can easily apply for your pension at the pension authority in your current country of residence. In all other cases, you can claim your pension directly through the Deutsche Rentenversicherung or through the German embassy or consulate in your country.  

Can you get a pension refund if you leave Germany?

If you decide to leave Germany, you may be entitled to a refund of your contributions to the German pension insurance. Your nationality and future country of residence play a big role. Please refer to our guide below for more information.

Disclaimer: Simple Germany or myself as an author do not provide investment advice or financial services. Please be aware that this article is intended to provide you with a brief overview of the German pension system. The statements, comments, and other content contained in this article, even if individual issuers or financial instruments are mentioned, are not to be construed as investment or pension advice and do not constitute, directly or indirectly, a recommendation or solicitation to buy, hold or sell any financial instrument or any advice relating thereto. It does not substitute any professional pension & investment advice. You are responsible for your own risk if you decide to participate in any form of investment. Please note that no investment can guarantee a profit. Every investment in securities involves risks and can lead to a complete loss of your invested money.